1. Facing an uncertain future:
Government intervention
threatens the global mining sector
Mining hot topic report: government intervention
The mining sector faces an uncertain Nationalisation: where the state takes control
future. Increasing and unpredictable of some or all of a country’s mining assets.
Indigenisation: where the people or native
government intervention across the populations are ceded control.
globe is adding further complexity
to a sector that is already heavily increased environmental legislation with numerous
laden with risk. regulatory frameworks in development around the
world.
The shadow of higher taxes, restrictive regulation Similarly, the growing calls for nationalisation
and indigenisation looms large over an industry and indigenisation of mining assets and resources
already grappling with the risks normally associated threaten the very existence of some mining
with exploration and extraction. companies. Organisations that have “jumped ship”
From a likely windfall levy in Peru, through from their home tax jurisdiction looking for a more
to potential mine nationalisation in South Africa, a relaxed set of rules must now contend with an
wide variety of government interventions pose a real uncertain future, particularly in Africa.
threat to commodity prices, corporate valuations
and, most critically, investment in the global mining
sector. For the most part, interventions are
motivated by financial and political pressures.
Governments looking to increase revenue –
whether to fund developing or indebted economies,
recover from the financial crisis or simply to top up
the coffers – are targeting what they see as a thriving,
profitable income source. With global demand
creating high commodity prices1, government taxes,
royalties and other sector-targeted revenue-boosting
measures are on the rise, particularly in Asia.
On the political front, governments are
responding to growing pressure from environmental
interest groups and the public. In the face of
devastating incidents, like the BP oil spill in the
Gulf of Mexico and the dramatic miners’ rescue at
the Copiapo mine in Chile, governments have
1
Bloomberg. Accessed at http://www.bloomberg.com/markets/
commodities/futures/ on 16 June 2011.
Mining hot topic report: government intervention 1

2. In short, government interventions are:
• raising sector uncertainty and complexity to Government intervention includes direct and
acute levels, complicating decision making and indirect taxes, royalty arrangements,
heightening risks nationalisation and economic empowerment
• increasing risk for investors, clouding corporate
valuations, making it harder to raise capital;
policies, as well as regulatory compliance with
and environmental and other government standards
• affecting project viability by reducing supply, and business criteria.
disrupting demand and limiting overall
profitability.
Below we describe the three key intervention areas:
Without clarity over the type and extent of 1. taxation
government interventions, the development of 2. nationalisation/indigenisation
the sector is in danger of stagnating, ultimately 3. environment
threatening global economic growth. in more detail, providing examples of each across the
world. We also suggest measures that companies and
governments can take to improve the situation.
Taxation: when the ‘take’ doesn’t
have much give
The tremendous profits being made in the
commodities markets are attracting significant As a simple measure the tipping point can be
attention from governments developing their reasonably estimated as the point where the
economies or looking to reduce deficits created by government’s aggregate ‘take’ – corporate taxes,
the global recession. Even governments that
weathered the storm relatively well are seeing
sales taxes, payroll taxes, royalties and special
mining corporates as a lucrative source of revenue. costs associated with doing business in a
This is, however, a short-sighted, potentially particular jurisdiction – exceeds 50% of profits.
harmful assumption.
Several factors make the spectre of increased
taxation an ominous one. At an operational level, the Around the globe
costs of meeting current booming demand will be Australia
further increased by taxation. While taxation Mining companies operating in
demands may raise immediate government revenue, Australia are experiencing
it will also reduce overall mining profitability. uncertainty due to the introduction
From the investor’s perspective, interest is likely of new federal taxes designed to replace existing
to diminish in proportion to the level of taxation, state-based royalty schemes. BHP and Rio Tinto
levies, royalties and other costs. The threat of have already publicly stated their reluctance to pay
additional taxation will lower company valuations much more in tax or royalties and would consider
and increase investor risk, making investment in moving operations to a nation such as Mozambique
jurisdictions with onerous tax burdens unappealing. where taxation is lower.
At worst, companies and investors may reach a The concept of resource rent taxation is being
tipping point, where they see taxes reducing their explored in many countries on the basis that it is a
potential returns to the point that they may simply more efficient cash flow based tax, compared to
walk away and search for more competitive royalty regimes which charge royalties on the gross
jurisdictions. value of extractions.
2 Mining hot topic report: government intervention

3. Taxation can also disrupt demand, with Africa
customers stating that they will not tolerate new Industry analyst Thomas Wilson predicts more
layers of taxation. China’s Iron and Steel Association governments in Africa and elsewhere, especially
chief recently said that Chinese steelmakers will not newly-elected ones, will look at raising mining taxes
be able to accept rising costs from the Australian and royalties amid historically high commodity
iron ore mining tax, as steel prices will reach a ceiling prices3. For example, the price of iron ore has risen
and downstream users, including automakers and from US$80/Metric Tonne in 2009 to US$178.7/
producers of home appliances, will not absorb rising Metric Tonne in Q1 2011. (International Monetary
costs. Fund). In some countries, such as Tanzania, the IMF
has actually advised governments to tax mining
Canada operations to meet their spending commitments.
With each province taxing mining This summer the country’s National Assembly will
companies at different rates, debate proposals for a super-profit tax on mining as
national competition is strong. part of the country’s five-year development plan.
Quebec recently announced CA$10bn of
investment in exploration, making it one of the Peru
most attractive mining jurisdictions in the world. Throughout the campaign for
The Fraser Institute’s annual Survey of Mining Peru’s recent presidential elections,
Companies ranked Alberta, Quebec, Saskatchewan both the main political parties
and Manitoba in the world’s top 10 most attractive campaigned on promises to tax mining companies.
mining regions2. Though President-elect, Ollanta Humala, pledged to
levy a windfall tax on mining operations, he now
says he will negotiate rather than impose an
unilateral levy4.
Nationalisation and indigenisation:
changing the state of play
Nationalisation, the takeover of a private company’s Around the globe
assets or operations by the state, and indigenisation, South Africa
increasing local participation in or ownership of Nationalisation is arguably the
company assets, are forms of government number one issue affecting the
intervention related in scope but with varying mining industry in South Africa, a
implications and perceptions. In extreme cases of move which will be causing concern among
nationalisation or indigenisation, third-party investors. With the ruling African National
investor interest could be wiped out. Even if Congress party debating state participation, analysts
measures don’t ultimately come to pass, interest will agree that reform of some sort is needed, but most
be highly limited as long as uncertainty remains. argue that full-blown nationalisation will be
detrimental.
2
Fred McMahon and Miguel Cervantes. Fraser Institute Annual Survey of Mining Companies. P. 10. Accessed at http://www.fraserinstitute.org/uploaded
Files/fraser-ca/Content/research-news/research/publications/mining-survey-2010-2011.pdf on 16 June 2011.
3
Mining Weekly, 10 June 2011. More mining tax, royalty hikes ‘inevitable’ – Control Risks, by Liezel Hill. Accessed at http://www.miningweekly.com/article/
more-mining-tax-hikes-inevitable-control-risks-2011-06-10 on 16 June 2011.
4
Reuters. Humala seeks to reassure Peru mining companies on tax. Accessed at http://www.reuters.com/article/2011/06/08/us-peru-election-idUST
RE 75702520110608 on 16 June 2011.
Mining hot topic report: government intervention 3

4. Namibia and Zimbabwe Venezuela
Indigenisation is In Venezuela, falling oil prices
in the spotlight combined with poor fiscal
in Namibia and management and rising gold prices
Zimbabwe. In the latter, proposals include the have switched the government’s attention to the
disposal of 51% of the shares in mining companies gold industry. In recent years, restrictions on exports
to indigenous Zimbabweans, which will apply to and foreign exchange controls, as well as increased
all companies with a net asset value of more than government participation through its own mining
US$1. operations and joint ventures, have become more
prevalent.
Environmental legislation:
fine tuning the green machine
Recent years have seen a number of environmental South Africa
disasters involving big business, of which BP’s Gulf In its recently released Diagnostics
of Mexico oil spill in 2010 was the most high profile. Overview6 document, the South
But while environmental events are an inevitable African Government commits to
component of industrialisation, media and social ensuring that “natural wealth is harnessed
media now put images, opinions and blame in the sustainably, in a way that protects our environment,
public arena seconds after the incident. The stream using science and modern technology to ensure a
of stories is continuous, providing interest groups growing economy that benefits all.”
with the ammunition they need to mobilise the
public. Governments around the world remain Germany
acutely aware that the green agenda is increasingly Germany’s decision to close all
important, and that tightly legislating the mining nuclear power plants over the next
sector is a political necessity as well as an ethical ten years is at least partly driven by
imperative. Though global governments are working the incumbent government’s need of the Green
to achieve common regulatory ground, the current Party’s support to stay in power.
global landscape remains diverse.
Canada
Around the globe Canada operates a two-step
Australia approval system, where
The Australian Association of environmental plans must be given
Mining and Exploration Companies approval at a provincial level and then at a national
(AMEC) says that areas recently level. A recent initiative to fall foul of the process
defined by the Queensland government as Strategic was the Prosperity mine, which was denied
Cropping Land Protection Areas are so vast the environmental approval by the government having
policy will potentially cause “major impediments” been granted it by the province. This has renewed
to the future of regional mining5. In addition miners complaints that the process is complex, time
in Australia are grappling with the proposed carbon consuming and too political.
taxation and how that will affect operations.
5
Mining Weekly, 31 May 2011. Qld introduces policies to protect cropping land from mining, by Esmarie Swanepoel. Accessed at http://www.miningweekly.
com/article/qld-introduces-policies-to-protect-cropping-land-from-mining-2011-05-31 on 16 June 2011.
6
National Planning Commission, Republic of South Africa. Diagnostic Overview. P. 4. Accessed at http://www.npconline.co.za/MediaLib/ Downloads/
Home/Tabs/Diagnostic/Diagnostic%20Overview.pdf on 16 June 2011.
4 Mining hot topic report: government intervention

5. Corrective measures: keeping
the mining sector strong
Recent years have seen a number of environmental South Africa
Mining corporates
disasters involving big business, of which BP’s Gulf In its recently released Diagnostics Overview6
of Mexico oil spill in 2010 was the most high profile. document, the South African stable taxcommits
• explore regions with minimal intervention threats and Government
But while environmental events are an inevitable to ensuring that “natural wealth is harnessed
frameworks
component of industrialisation, media and social sustainably, in a way that protects our environment,
media now put financial plans blame strategies factor government interventions
• ensure images, opinions and and in the using science and modern technology to ensure a
into multiple tax and environmental scenarios that benefits all.”
public arena seconds after the incident. The stream growing economy
of stories is continuous, providing interest groups
• be willing to work with local, regional and national governments
with the ammunition they need to mobilise the Germany
• ensure that key risks are understood and articulated toall nuclear power plants
public. Governments around the world remain Germany’s decision to close investors,
acutely aware that your investors’ tipping points carefully; when and where by the
consider the green agenda is increasingly over the next ten years is at least partly driven
important, and that tightly legislating the mining incumbent government’s need of the Green Party’s
will their cost of doing business outweigh stay in power. or benefit?
sector is a political necessity as well as an ethical support to the profit
imperative. Though global governments areand customs and recognise that you may
• understand the local rules working
need to give something back to theCanadaoperates a two-step approval system, where
to achieve common regulatory ground, the current
global landscape remains diverse.
community.
Canada
environmental plans must be given approval at a
Around the globe
Governments provincial level and then at a national level. A recent
Australia initiative to fall foul of the process was the
• work to end policy and taxation uncertainty; createwasstableenvironmental
The Australian Association of Mining and Prosperity mine, which a denied
legislative environment that enables operations, planning and granted it
Exploration Companies (AMEC) says that areas approval by the government having been
recently defined by the Queensland government as by the province. This has renewed complaints that
investment within the mining sector
Strategic Cropping Land Protection Areas are so the process is complex, time consuming and too
vast the policy will potentially cause “major excessive intervention stifles investment
• recognise that short-term, political.
and exploration
impediments” to the future of regional mining5. In
addition miners in Australia are grappling with the
• resist targeting mining as if it were a limitless taxation/revenue stream
proposed carbon taxation and how that will affect
operations. environmental protection without complication
• seek
• work to streamline the compliance process
• understand and appreciate the many positive aspects that mining can
and does bring to your economy.
Mining hot topic report: government intervention 5

6. Interventionist policy mines
a perilous vein
Government intervention – unchecked UK Australia
and independent of broader government Gerry Beaney Dan Carroll
T +44 20 7728 2589 T +61 (7) 3222 0200
and sector strategies – poses a real threat
E gerry.d.beaney@uk.gt.com E dan.carroll@au.gt.com
to mining. While augmenting revenue,
reducing fiscal deficits and protecting the Martin Goddard Scott Griffin
environment are clearly legitimate T +44 20 7728 2770 T +61 (2) 8297 2755
E martin.a.goddard@uk.gt.com E scott.griffin@au.gt.com
government endeavours. The resulting
instability and uncertainty of current South Africa Holly Stiles
policy-making endanger the mining Steven Kilfoil T +61 (2) 8297 2400
sector’s future development. T +27 11 322 4530 E holly.stiles@au.gt.com
E skilfoil@gt.co.za
Moreover, though interventionist Russia
policies may successfully meet some Canada Elena Dmitrieva
governments’ short-term fiscal Mark Zastre T +7 495 258 99 90
requirements, they may ultimately hinder T +1 604 443 2170 E elena.dmitrieva@ru.gt.com
E mark.zastre@ca.gt.com
overall global financial recovery. This will Sergey Tishakov
distort the cost of commodities and Troy MacDonald T +7 495 258 99 90
capital and affect the viability of T +1 416 369 6401 E sergey.tishakov@ru.gt.com
numerous international exploration and E troy.macdonald@ca.gt.com
United Arab Emirates
extraction projects. Anand Beejan Martin Orbesen
For more information on government T +1 514 878 2691 T +971 4 2688070
intervention in the global mining sector, E beejan.anand@rcgt.com E martin.orbesen@gtuae.net
or to learn what it could mean for your
company, please contact:
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www.internationalbusinessreport.com
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